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         Third Nigerian Industrial Development Bank project
  

Introduction

1. The Nigerian Industrial Development Bank (NIDB) was constituted in 1964 as the successor to the largely British owned Investment Company Of Nigeria Limited (ICON). IFC assisted in the reconstitution of NIDB and purchased 25 percent of NIDB's equity. Following the indigenization decree of 1972 Government bought out all shareholders at par, including IFC. NIDB has received four direct loans from the Bank, the third, approved in 1978, being the one under review. 1/ However, since this report is being prepared more than three years after completion of the third loan, and since the fourth loan is also in its last year of completion the review has covered over ten years of NIDB's general performance (1978-1989).

Objectives

2. The basic objectives of the project supported by Loan 1597-UNI were: (a) to provide NIDB with a portion (about 20%) of the total foreign exchange resources needed to finance industrial projects and to facilitate NIDB's external resource mobilization efforts; and (b) to further strengthen NIDB's institutional capabilities, particularly in the areas of financial and economic appraisal of investments. Though not explicitly stated, another important objective was to promote a closer working relationship between NIDB and the Federal Ministry of Industries (FMI), thus enabling NIDB to contribute to FMI's industrial policy decisions and impact on the Nigerian industrial sector as a whole.

1/ The experience with the first two loans is reviewed in PPAR dated October 10, 1977 (No. 1750). The fourth loan is still under implementation.

Implementation Experience

3. The project became effective on October 24, 1978. The first year was quite successful with commitments totalling US$20.8 million (35%) for six subprojects. Thereafter, progress slowed down considerably, so much so that by December 31, 1980 (the original terminal date for subproject approval), only 56 percent of the loan had been committed. At the request of NIDB the terminal date for subproject approval was extended three times finally to August 30, 1983 (Part I, para 4.01). As in the case of commitments, disbursements under the line of credit were also significantly slower than appraisal estimates (Part I, para 4.02). A total of US$8.9 million in uncommitted (US$5.3 million) and undisbursed (US$3.6 million) funds was finally cancelled under the line of credit by the loan cloning date (November 1986), per NIDB's request.

4. On the institution building side, project implementation was initially slow in the first two years. Staff morale was low and there was a high turnover resulting from NIDB's relatively low salary scales. This situation improved significantly when in 1982 a revised salary structure was approved following persistent efforts of NIDB's management with strong Bank support. In other aspects of institution-building, e.g., improvement in project appraisal and supervision capabilities, progress was also rather slow due to staff turnover and the time needed to train the new staff appointed to replace the experienced staff (Part I, para 5.03).

Results

5. The project under review was implemented just after the oil boom of the 1970s, during the years that the oil market had considerably weakened but the Government had not fully recognized the gravity of the economic situation. GDP was sharply declining and industrial activity was severely affected by the stringent import policies that were followed.

6. NIDB's overall performance under the loan was mixed. While satisfactory progress was made in certain areas, considerable work still remained to be done in some others. A total of 26 subprojects were financed under the loan, one more than the 25 expected at the time of the appraisal. All except one were new ventures. Moreover, as expected at appraisal, all these projects were majority Nigerian-owned (Part I, para 5.02). There was a fairly broad geographic dispersal of NIDB's assistance compared with its outstanding portfolio at the time of appraisal. The subprojects covered a reasonably broad spectrum of industrial activities (Part I, para 5.11). Performance of subprojects, where adequate information is available for making a reasonable judgement, appears to be also mixed (Part I, para 5.16).

7. Most of the other objectives set out at the time of the appraisal were realized, in particular the following: (a) upward revision of salary structure (Part I, para 5.03); (b) resource mobilization (Part I, para 5.05); (c) geographic dispersal of NIDB's assistance (Part I, para 5.06); (d) increase in NIDB's interest rates, maintaining the minimum 10.5% lending rate required under the Bank Loan Agreement (Part I, para 5.09); and (e) improved working relations with the FMI (Part I, para 5.10).

8. NIDB has been able to maintain its lending operations with a consistent, although relatively low, level of profitability since its inception. However, in the Nigerian economic environment as in many other countries that suffer from a system of price distortions, profitability alone cannot be considered sufficient to ensure sustainability in the long run. NIDB has undoubtedly achieved the basic function of transferring investment resources to industrial borrowers, but given the high level of arrears (325 of portfolio as at December 31, 1989 was affected), and the poor implementation record and performance so far of many sub-projects, NIDB's capacity for project selection needs considerable improvement. In addition NIDB's interest accruals policy and possible under-provisioning of doubtful debts makes its profitability somewhat illusory (Part I, para 6.09). While NIDB's sustainability is largely dependent on Government support, it must be stated to its credit that it has in the recent past diversified its operations through: (a) mobilization of domestic resources through debenture issue; (b) undertaking some commercial banking activities; and (c) establishment of two subsidiaries to carry out leasing and management consultancy operations. NIDB management now recognizes the need to restructure the institution in light of the changed and more open environment and has recently had a strategic study undertaken, and a restructuring plan prepared for NIDB by Industrial Credit Corporation of Ireland, a DFI which has itself undergone a successful restructuring. The reorganization is presently under implementation (Part I, para 5.08). Furthermore, NIDB, after a slow start is now intensifying its loan recovery efforts through improved supervision and debt collection practices and is about to initiate on an Urgent basis an effective credit risk management program.

9. In summary, given the adverse macroeconomic circumstances that prevailed during the period that the project was being implemented, the project is considered partly successful.

Findings and Lessons Learned

10. NIDB has carried out its mandate under difficult conditions. With Government support, it has been able to overcome many operational and organizational problems. A few lessons may be drawn from experience with this Loan. First, the assumption of the exchange risk by NIDB's subborrowers in a context of exchange rate instability (a major devaluation took place in September 1986 as part of the adjustment process) had seriously affected their viability and thus undermined NIDB's own portfolio quality and creditworthiness, although the Government did subsequently step in to share the exchange losses. This emphasizes the importance of DFIs' having a reasonable balance between foreign currency and local currency liabilities (Part I, paras 5.12 and 10.03). Secondly, institution building is a slow and continuous process, lack of discipline in following sound banking practices and inadequate commitment to continued staff training could adversely affect the institutional effectiveness (Part I, para 10.04). Thirdly, the NIDB should have contained to some extent its zeal for its developmental role and maintained a better balance between developmental and commercial objectives (Part I, para 10.05). Lastly, NIDB's experience emphasizes the need for more thorough sensitivity analyses of all subprojects to take account of the impact of changing economic situations (Part I, para 10.06).



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